Rehab Loans: The Fix for the Fixer Dilemma

It's a classic dilemma: you found the perfect fixer home for you, but it needs some serious work, something crucial enough to the performance of the home that the banks won't lend on it without the work being done.  The seller can't afford it: after all, if they had the money to do the work it would have already been done (and likely they wouldn't be selling the home).  Do you take a chance and pay for work before closing in order to get the loan to buy the house?  What if something happens and the deal falls apart?  You're out the cash and the seller now has an improved property to sell at a higher price to someone else. 

The solution is a rehab loan (also known as a remodel or renovation loan).  These loans are a highly useful tool that many people don't know are available: not all banks offer them and they are tricky for inexperienced loan brokers.  But the process is intuitive: you find a house that needs work, you write up an offer, negotiate a deal, then bring in a certified inspector who helps you do the numbers and create your list of necessary improvements and their costs.  You submit the paperwork to the bank, they send out an appraiser who determines what the value of the home will be after you have completed the improvements.  If the numbers add up, you're in business.  It's not as difficult as it would sound: on FHA rehab loans they will lend on acquisition cost (which would be the purchase price and the cost of the repairs) or 110% of the future appraised value.   When the deal is all said and done, your money for repairs will be in an account held by the lender and released to you as the work is completed.

As one would expect, there are a few extra hoops to jump through and the fees for these loans are a little higher: after all, the bank is taking a greater risk lending in this scenario.  But the rewards are tremendous: buyers can get into homes that otherwise would be unavailable to them, and often at great prices.  Consider all those fixers out there that are terrific deals but many people think are unavailable to them because they don't have the cash to do the needed work.  Rehab loans are a strong solution in a market full of opportunities.